The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary. – HL Mencken, 20th century American writer
Kinder Morgan stock is perhaps the reigning poster child for the message being conveyed by the collapsing price of oil as it pertains to the U.S. economy:
But take a look at that graph. In all probability that is likely the path that the real inflation-adjusted U.S. GDP is about to follow. The price of oil is collapsing, not because supply is flooding the market but because, at the margin, demand for the quantity supplied is falling. It’s falling because basic, grassroots-level economic activity is collapsing. Trucking and rail – freight volume – in the U.S. is collapsing at a shocking rate – Heavy Truck Orders Plunge 59% in November; US Freight Shipments In North America Plunge. Freight shipping, both truck and rail, are heavy users of diesel fuel. You can figure out the rest of the narrative from there as it pertains to the demand for oil…
Housing is now rolling over. Notwithstanding the manipulated and highly misleading data reporting from the Census Bureau and the National Association of Realtors, home sales volume is rolling over and it is about to go off a cliff. This is exactly why the Federal Government is now trying to roll out zero-down, zero-percent mortgage financing – LINK. I’m not making this up. The Federal Government, backed by the Taxpayer, is now going to fill the void left by Countrywide, Wash Mutual and Wachovia after those banks blew up on subprime crap mortgage paper. Instead of bailing out the big Wall Street banks who choked on this garbage, let the Taxpayer make the loans directly. That avoids the political disaster of the next bank bailout.
But the message is desperation. Desperation to force air into a collapsing economic system. The next shoe to drop will be auto sales and the collapse of the related subprime junk debt which has been issued for the purpose of propping up the auto industry and the related manufacturing. Freight shipments tells us this business is collapsing.
Just about anyone with a credit score over 600 can walk into an auto dealer and get a 135% loan-to-value loan on a used car without any income verification documentation. Most OEM’s are now funding 0%, 72-month loans for new cars. Both flavors of car loans are funded by banks, large and small. Here’s what this looming disaster looks like graphically:
As the pool of potential debt-financed car buyers shrinks, the blue line (auto sales) will do a cliff-dive. As the existing pool of loans age, the default rates will soar and the universe of subprime loans will begin a default-driven death spiral. It’s going to get very ugly over the next 12-24 months in the auto sales and auto finance sector.
You can read more from Dave Kranzler at his site InvestmentResearchDynamics.com